Whatâ€™s Driving the Land Price Vehicle?

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Very few Corn Belt farmers are unaware that 74 acres of northwestern Iowa farmland reached the $20,000/acre mark recently, with one farmer purchasing the land from an out-of-state owner. It was the second occasion in a short period of time that Sioux County, IA, farmland established a new record for land values. But what is driving those values?

As land prices push higher every week, growing concerns are expressed that the values will not hold and land prices will collapse into an economic meltdown for rural communities. They point to the early 1980s as an example. Common to every discussion are questions about what is pushing prices higher and whether those prices are reasonable. The latter is the tougher question of the two for a collection of Purdue economistswho addressed land values(pdf), which make up 85% of agricultural production assets.

If you have just purchased farmland for a price that makes you wonder about whether you did the right thing, the economists say farmland is a capital asset that will produce earnings indefinitely into the future. That means the price you paid represents the present value of those future returns. Subsequently, what those earnings are expected to be, are one of the drivers of farmland values.

The economists say another dynamic is the opportunity cost, which are the alternatives that might have been purchased with the same money. The economists equate farmland value with its income, divided by the opportunity cost, from which the income growth rate has been subtracted. The content of such a formula indicates increased values are derived from increases in income, decreases in the cost of money or increases in the growth rate of the income generated by the farmland.

The latter is a function of commodity prices, and the Purdue economists admit that is a function of volatility and difficult to predict. Another factor is the small amount of farmland sold each year, which has been estimated at 1.5% of the total amount available. With so few transactions, limited buyers, limited sellers and other associated with the sale have a chance to impact the future.

Earnings of Corn Belt farmland have been driven by corn and bean prices, and China and ethanolbeing major factors in commodity demand, they can account for 20 million acres in production shift from year to year. The economists say shortfalls in production and increasing utilization of the crops have created shortages that pushed prices up and increased their volatility. That has tended to increase revenue from row crop production, whether one is an operator or an owner.

The latter should be concerned about the value of the farmland, and whether cash rents can maintained into the future. But the Purdue economists say the relationship between land values and cash rents are one of the most common in agriculture. The ratio indicates how much buyers are willing to pay for farmland and how much rent they are willing to take in return. They say it is like the price to earnings ratio for an equity stock. For central Corn Belt farmland, some investors are willing to pay more for such an income stream. And the specialists say it is possible that cash rents have not been fully adjusted to the higher land values of today.

Interest rates have a major role in determining the value of farmland, by affecting the opportunity cost for alternative investments and the cost of capital. At low interest rates the impact on land values can be substantial. If the capitalization rate was 4%, then an earnings multiple of 25 would be applied to each dollar of current income. But an interest rate of 8% would produce a multiple of 12.5. The economists say, “Using the simple capitalization model, land that produces cash rent of $200/acre with capitalization rates of 8% and a multiple of 12.5 would be valued at $2,500. In contrast, the same cash rent with capitalization rates of 4% and a multiple of 25 would be valued at $5,000/acre.” Current values of farmland will have a wide range of capitalization costs, but if they increase, then pressure would be put on cash rental rates.

Summary

Increases in farmland values have resulted from higher farm earnings and lower than usual interest rates. If earnings decline and interest rises, then land prices would decline. If investors see less chance for income through cash rents, then they will not bid up prices. Current prices might seem reasonable to some and unreasonable to others, however they reflect the investor’s belief that income will remain high and investors are evaluating the market as part of their bidding process. However, when investors are using non-agricultural production reasons for making purchases, then clearer heads may not be prevailing.

Discuss this Article 3

I have a theory. Some people purchase the farm lands and convert the crops to crop that can produce biodiesel. As car production increases, demand for alternative forms of fuel will rise, and that may make fuel crops highly valuable. Perhaps this is one reason why prices are rising.
Thomas - http://www.carid.com

The farm owners are now making the most from farm lands by producing crops and seeds. I know about such crops and crop residues, those are using in the automobile sectors. They also making bio-diesel from such plants or crops and the bio-diesel is very useful for the future. Due to the options of these alternative things or fuels or we can say the other form energy which can help in the running of a vehicle, the car and other vehicle manufacturing also increases. Auto repair industry also getting the benefits of it.

Agriculture is the most important part of Country's economic growth. People in a country need to be focus on the development of Agriculture and need to work on the maximum production or the maximum Agricultural outputs. For all this, We need best Agricultural equipment or the heavy duty vehicles those can easily done all types of Agricultural works.
Farmers or people can get the Bio-diesel from plants or crops and Bio-diesel is quite useful and most essential for our future. It is the best replacement of Diesel and there is no such harm to atmosphere. Diesel can easily pollute the Atmosphere, but Bio-diesel is safe and will not pollute the environment like Diesel. Automobile industry will be really getting benefited by this. Volkswagen, BMW, Audi etc, will be run by Bio-diesel. Volkswagen Repair is necessary for the Volkswagen users to maintain their car's performance better.